The issue of enforceability of an arbitration clause contained in an unstamped/ insufficiently stamped agreement has been the subject of various judicial pronouncements. Conflicting decisions have been delivered by various High Courts and even the Supreme Court (“SC”) did not lay down a conclusive position. Recently though, a five judge bench of the apex court, through its judgment in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited (“NN Global”), finally settled the law on enforceability of arbitration agreements contained in unstamped/ insufficiently stamped arbitration agreements.
Pre NN Global
A Division Bench of the SC in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. had held that if a document is found to be unstamped/ insufficiently stamped, then even the arbitration clause embedded in it cannot be acted upon as per Section 35 of the Indian Stamp Act, 1899 (“Stamp Act”). The Court also laid down the procedure to be followed when an arbitration agreement is contained in a contract, which is not duly stamped as per the scheme of the Stamp Act.
Post the said judicial pronouncement, a legislative amendment through Section 11(6A) in the Arbitration and Conciliation Act, 1996 (“Act”), came to be inserted in the Act, which restricted the scope of judicial intervention to merely examining the existence of an arbitration agreement. Post the insertion, the SC held that the Courts have a confined role to merely probe the existence of an arbitration agreement when deciding upon an application to appoint an arbitrator.
This position was again changed when the division bench of the SC in the case of Garware held that the ruling in SMS Tea Estates stayed untouched by the insertion of Section 11(6A) in the Act. The SC noted that an agreement only becomes a contract when it is enforceable by law, and since unstamped agreements are not enforceable, even arbitration agreements contained in it are not enforceable and hence cannot exist. This view, taken in Garware, was specifically approved by a three Judge Bench of the SC in Vidya Drolia,, wherein it was held that existence and validity being intertwined with each other, an arbitration agreement would not exist if it is illegal or does not satisfy the mandatory legal requirements for it to be enforceable, one of which is payment of stamp duty.
A three-judge bench of the SC, in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited, doubted this position, observing that since an arbitration agreement is an independent contract, it cannot be invalidated merely by insufficiently stamped main contract. Given that the previous Vidya Drolia judgment was also pronounced by a three-member bench, the SC referred the issue to a larger bench to render the verdict in NN Global.
A Constitution Bench of five judges of the SC has decided the reference by a 3:2 majority, with the majority view differing from the views expressed in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited.
The Arbitration Agreement and the Contract Act
The SC noted that only those agreements that are enforceable by law are contracts as per the scheme of the Indian Contract Act, 1872 (“Contract Act”). It then proceeded to interpret Section 35 of the Stamp Act, which makes any unstamped or insufficiently stamped document inadmissible in evidence. The court also noted how the provision is strictly worded and does not provide any collateral purpose exemption to such documents, unlike a registerable document which is not registered.
The Court noted that in the usual course, agreements are enforced through civil courts and by public authorities in some cases. As the scheme of the Stamp Act precludes any authority (Court or public authority) from acting upon/ giving effect to an unstamped/ insufficiently stamped agreement, the Court said, it is not fathomable to conclude that such agreement would constitute enforceable agreements. The Court, thus, concluded that such an agreement would not be enforceable till it is validated as per the procedure provided under the Stamp Act as it would not exist in law till then. The Court juxtaposed this view with Sections 2(j) and 2(g) of the Contract Act which renders an unenforceable contract to be void. The Court, further, added that an unstamped instrument, of which the arbitration clause is a part of, cannot be allowed to be used as it would amount to establishing a collateral transaction, considering arbitration agreement has an independent existence from the main contract.
Appointment of arbitrators under Section 11 of the Act
On the restriction imposed by Section 11(6A) of the Act, the Court held that the section envisages a contract to begin with for the bar to operate. The Court ruled that the said section does not merely envisage the literal existence of an arbitration agreement, but rather an enforceable contract. Hence, an arbitration agreement must satisfy the requirements under the Contract Act without which there can be no reference to arbitration. The Court went on to add that the rationale behind including 11(6A) in the Act was to stop excessive interference by Courts and the effect of the said insertion cannot be stretched to mean that the Courts ought to ignore an existing law (Stamp Act, in this case) altogether.
The Court also had the opportunity to refer to the scheme framed by it for the appointment of arbitrators as an interesting question of law was posed before it. It was contended that since the Act provides for the production of a certified copy of the arbitration agreement, which under the scheme of the Stamp Act cannot be impounded, hence the Courts cannot go into the question of sufficiency of stamping in the proceedings under Section 11 of the Act. The Court responded by noting that although the scheme provides for production of a certified copy, such copy needs to disclose on the original document that the stamp duty has in fact been paid. Further, the Court held that if it is found that the original document is not sufficiently stamped, though the Court cannot impound the certified copy under the Stamp Act, it is nonetheless precluded from acting upon it.
Kompetenz of the Tribunal or the Court
The SC rejected the contention that the arbitrator should have to deal with the issue of sufficiency of stamping, holding that the courts cannot shirk their responsibility mandated by law. However, a caveat was added by the SC, providing that when the document on the face of it appears to be stamped but it’s sufficiency is in contention, and such contention prima facie appears to be without foundation, then the reference is to be made on the basis of the existing arbitration agreement and the matter is to be left to be decided by the arbitrator.
The minority view
The minority’s dissenting judgement, noting the history and the rationale behind the introduction of Section 11(6A) of the Act, concluded that the copy of the arbitration agreement presented during the proceedings under Section 11 of the Act is an enforceable document irrespective of the stamp duty paid on it. It ruled that the question relating to the sufficiency of stamp duty or the validity of the arbitration agreement, etc., are to be left to the arbitral tribunal to decide in terms of Section 16 of the Act. The Court referred to the objective of avoiding the delays and procedural complexity of a court litigation behind the enactment of the Act and observed that the said objective would be achieved if the question of adequate stamping is deferred to be decided by the arbitration tribunal.
Position in other jurisdictions
An analysis of some of the case laws from other jurisdictions will show that the courts have been inclined to uphold the validity of arbitration agreements even when the contract in which the arbitration agreement is contained, is regarded as invalid for any reason.
Section 7 of the United Kingdom’s Arbitration Act, 1996, provides that an arbitration agreement which forms or was intended to form a part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement. Though similar to Section 16 of the Act, it is couched in a much wider language than its Indian counterpart. The language provides that an arbitration agreement would survive even when the other agreement (of which the arbitration agreement is a part of) does not or its existence is questionable.
The Supreme Court of United States, in Buckeye Check Cashing, Inc v. Cardegna et. al, relied upon Prima Paint and Southland Corp., and noted that according to the federal arbitration law, an arbitration clause in a contract can be separated from the rest of the contract and if there is a challenge to the validity of the contract, except for the arbitration clause itself, the arbitrator will decide on the matter first.
The US Supreme Court drew distinction between the types of challenges to an arbitration agreement. It held that a party’s objection to a different provision or the entirety of a contract does not stop a court from enforcing a particular arbitration agreement. This law recognises that an arbitration clause within a contract can be separated, or “severed,” from the rest of the contract.
While dealing with a challenge to the constitution of an arbitration tribunal on the grounds that the law governing the contract would govern the arbitration as well, the High Court of Singapore in BNA v. BNB and BNC held that the only limit on the doctrine of separability is that it should go no further than is reasonable to give effect to the parties’ intention to arbitrate their disputes. The Court further added that the primary purpose of the doctrine is to protect a comprehensive arbitration agreement that clearly demonstrates the parties’ intention to resolve their disputes through arbitration. This protection ensures that the agreement remains valid even if the underlying contract is deemed invalid for other reasons.
The verdict has already raised several questions as it is bound to affect the practice of arbitration in India. While it is absolutely well founded that the necessary stamp duty must be remitted for an arbitration agreement to be valid, the NN Global verdict makes it mandatory for a court to decide this question at the stage of appointment of an arbitrator. In a country where judicial delays and backlogs of commercial cases are an unfortunate reality, the present judgment may not only increase judicial workload, but may also delay initiation of arbitration proceedings. A recalcitrant respondent may in fact be tempted to not cooperate in the process of constitution of an arbitral tribunal, citing stamp duty issues which will ultimately have to be decided by a court of law.
While the judgment specifically states that it has not dealt with the issue of grant of interim reliefs, parties are bound to question the grant or plea for interim relief in disputes arising out of inadequately stamped or void agreements. This decision can thus lead to exacerbated delays in arbitration proceedings, right from its inception. It may thus be advisable for stakeholders in India to revisit their respective contracts and ensure that the correct stamp duty is paid, to avoid any judicial delays at the stage of initiation of arbitration proceedings.
Considering the pro-arbitration stance of the government in recent years, and its attempts to make India an arbitration hub, it is possible that the legislature would bring in amendments to the Stamp Act and/ or the Act, to clarify and streamline their interplay and avoid the potential delays that can accrue due to this decision of the Court.
 Civil Appeal Nos. 3802-3803 of 2020 decided on April 25, 2023.
 (2011) 14 SCC 66.
 Duro Felguera, S.A. v. Gangavaram Port Limited, (2017) 9 SCC 729.
 Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209.
 Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1.
 (2021) 4 SCC 379.
 In the case of Harbour Assurance v. Kansa General International Insurance, 1 Lloyd’s Rep. 455 (CA), the Court of Appeal ruled that as long as the arbitration clause is not directly challenged, the agreement to arbitrate can still be valid even if the contract itself is found to be invalid.
 US SC 440 (2006).
 Prima Paint Corporation v. Flood & Conklin MFG. CO., 388 US 395 (1967).
 Southland Corp. v. Keating, 79 L Ed 2d: 465 US 1 (1984).
 Rent-A- Center, West, Inc. v. Jackon, 561 US 63 (2010).
  SGHC 142.
 In Para 218 and 304.4 of the judgement in NN Global, the Court, in its minority opinion, has urged the legislative wing of the State to revisit the amendments necessary in the Stamp Act and/or the Act to remove the inconsistencies between the two. The Court has noted that this is necessary for a smooth interplay of these two Acts and for achieving the objective of speedy justice enshrined under the Act.